April 3 (Bloomberg) -- The U.S. Financial Stability Oversight Council today approved a final rule to help the panel determine which non-bank financial firms require Federal Reserve scrutiny.
The council, headed by Treasury Secretary Timothy F. Geithner, approved the criteria to identify which firms may be systemically important and pose a potential risk to the financial system. The final rule comes after two attempts by the panel, commonly referred to as FSOC, to define systemic risk designation standards.
“This rule, this designation, this interpretive guidance is an important tool provided in Dodd-Frank for extending the parameter of transparency oversight and prudential supervision over parts of the financial system that can be a particularly important source of credit to the economy and potentially important source of risk in crisis,” Geithner said at today’s FSOC meeting.
Geithner said on Feb. 2 that the council would designate the first non-bank financial companies as systemically risky this year. Under the Dodd-Frank act, banks with over $50 billion in assets were automatically deemed risky to the financial system in the event of their failure.
The final rule regulators approved is largely unchanged from that proposed in October. Under the rule, regulators will evaluate non-bank financial companies with more than $50 billion in assets if they meet any one or more of the following thresholds: A 15-to-1 leverage ratio; $3.5 billion in liabilities on derivatives contracts; $20 billion of outstanding loans borrowed and bonds issued; $30 billion in gross notional credit-default swaps outstanding; or a 10 percent ratio of short-term debt to assets.
Under a three-step process, the council will use additional data, including size, interconnectedness and liquidity risk, to identify a subset of non-bank financial companies. The council will use publicly available figures to analyze the companies, and then regulators will contact the firm in question to collect more information.
The council will continue to evaluate and adjust this framework and the thresholds, as appropriate, as more data about firms and industries, such as asset managers, hedge funds, private equity firms, and swaps entities, become available.
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